The Billing/ Accounts Receivable/ Cash Receipts (B/AR/CR) Process - this chapter spotlights this process and describes the various users of the enterprise system and enterprise database in the organizational setting.
Introduction- the OE/S performs the critical tasks of (1) processing customer orders, and (2) shipping goods to customers. The B/AR/CR completes the order-to-cash process with 3 activities:
(1) billing customers (collect and deposit cash)
(2) managing customer accounts (sales returns, bad debt, sending periodic statements)
(3) securing payment for goods or services rendered (record invoices and cash collections and inform general ledger process)
The process is an interacting structure of people, equipment, methods, and controls designed to create information flows and records that accomplish the following:
Support the repetitive work routines of the credit department, the cashier, and the Accounts receivable department. – This is accomplished by capturing, recording, and communicating data resulting from the tasks of billing customers, managing customer accounts, and collecting amounts due from customers.
Support the problem – solving processes of financial managers. – this is accomplished by aging accounts receivable or writing off worthless accounts.
Assist in the preparation of internal and external reports – this is accomplished by including GAAP based financial statements.
Horizontal View of B/AR/CR:
1. Shipping Department informs the accounts receivable department (billing section) of shipment.
2. Account receivable department (billing) sends invoice to customer.
3. Accounts Receivable department (billing) informs general ledger process that invoice was sent to customer.
4. Customer, by defaulting on amount due, informs credit department of nonpayment.
5. Credit department recommends write-off of the receivable and informs accounts receivable department.
6. Credit department, by changing credit limits, informs sales order department to terminate credit sales to customer.
7. Accounts receivable department informs general ledger process of write-off.
8. Customer makes payment on account.
9. Cashier informs accounts receivable department (cash applications sections) of payment.
10. Cashier informs general ledger of process of payment.
Organizational Setting- the key players in the B/AR/CR process are in the finance department. Within this department, there are two functions that are segregated, the treasury function and the controller function. The Treasury department effects the process by extending credit to customers (Credit Managers) and by collecting payment (Cashiers). The controller department handles the recordkeeping functions. It is important to segregate the duties of these departments so that their goals are not conflicting.
Managing the B/AR/CR Process: Leveraging Cash Resources:
Self-Service Systems (CSS) - The CSS system allows a customer to access information, perform a task, or complete an inquiry without the aid of the organization's employees. An example of this type of system is an automated phone system that allows the user to listen to a set of options and key in the departments they are looking for. This is popular with many companies as they no longer need to staff large call stations. More advanced systems can allow customers to check production planning for manufacturing in the future to determine if goods will be available when they need them.
Cash Receipts Management - this is freeing up funds so they can be invested to earn interest or used to reduce debt and save on interest expense. Management wants to shorten the collection time from when they make a sale to when they collect on the sale. Treasurers face problems as there are delays in payments, such as the float on a check (the time it takes for the bank to process the transaction and send payment to the organization). There are many ways Treasurers fight this float time: The Magnetic Ink Character Recognition (MICR) that expedites the processing of checks throughout the banking channels. The MICR code sorts checks at a rate of nearly 100,000 an hour. Credit cards (Charge Cards) are when a 3rd party removes from the collector the risk of noncollection from the vendor. This requires a fee from the vendor and the retailer submits the charges to the credit card company for reimbursement and the credit card company bills the customer. Debit cards are the collector will transfer funds electronically from the payer’s to the collector’s balance. This eliminates the ‘Float’ and expedites payment from the customer. Electronic Funds Transfer (EFT) is performed through an Automated Clearing House (ACH) and is one of the first solutions to combat the float time. Through a prearranged agreement between the trading parties, the collector's bank account is credited and payers account is debited for the payment. An example of this is automatically depositing your paycheck at work.
EFT uses a variety of technologies to transact, process, and verify money transfers and credits between banks, businesses, and consumers. The Federal Reserve Fedwire system is the ACH mentioned above. It obviously reduces the time and expense required to process cheks and credit transactions. A lockbox is a postal address that is used solely for the collection of collecting checks. A firm will have these lock boxes all over the country so the mail arrives quickly and the bank speeds up the lockbox's check processing. The bank constantly processes the lockbox receipts, providing a quick update to the firm's bank balance. Electronic lockbox is similar to the traditional lockbox but the bank scans the payer's remittance advice and sends it straight to the collector's accounts receivable system. The electronic lockbox allows the company to post cash receipts more rapidly, at reduced cost, and with more accuracy. Electronic Check resembles a paper check with the inclusion of the customer's name, seller's name, financial institution, amount, and digital signature. These are protected with public-key cryptography to protect the customer's account from illicit activity. Electronic Cash has started to catch on with banks, with this process, the customer creates an "electronic wallet." Then you can spend out of your wallet. This however is not traceable like a check.
Fraud
Lapping is a scheme involving the misappropriation of customer accounts as a result of the lack of a segregation of duties. It occurs when the person recording the transaction receives payment and deposits it. The person will steal a customer’s payment and use other customer’s payments to cover their tracks The most current initiative in banking that has increased fraud on the A/R side is done through Check 21 which now allows a substitute electronic image to be presented at a customers bank almost immediately giving authorization to debit the drawor's account. This can lead to the ready acceptance of fraudulent checks against an unauthorized account.
Another common fraud is kiting. Kiting is "The common practice of allowing depositors to have immediate use of uncollected funds facilitates the scheme. Indeed, Regulation CC mandates early access to deposited funds. In the typical scheme, an NSF check is written by the malefactor on one account and then deposited into an account at another institution. A check drawn on the second account is then used to cover the resulting overdraft on the first account. Taking advantage of the float caused by normal delays in the collection system, the wrongdoer creates fictional balances in each account and uses these balances to obtain cash advances"(http://students.cup.edu/col4145/).
Logical Process
Remittance advice is business documentation used by the payer to notify the payee of the items being paid for. These may be an invoice copy, a stub attached to an invoice, or a stub attached to the payee’s check. The RA is used to initiate the recording of the cash receipt.
The accounts receivable master data is a repository of all unpaid invoices issued by the organization. When an invoice is created, a receivable is created in the master data. The records are updated at the time of payment. There are two AR systems that exist:
The balance only system- which consists of a customer’s current balance due, past-due balance, and the finance charges, payments, and total balances due. Each month unpaid current balances are rolled into the past due balances.
The open-item system is more complex and appropriate when the customer makes payments for specific items. The system is organized such that each record consists of individual invoices against all payments and adjustments are applied. A periodic statement can be brought up and show all invoices that need to be settled along with payment details. Each customer account and invoice are aged separately.
Data Descriptions in Billing/Accounts Receiveable/Cash Receipts
Sales Event Data-on or more invoices records (details contained in the invoice data
Post-billing system --- Invoices are prepared after the goods are shipped and then the shipping notice is compared to the sales order notice. There is probably a delay between receiving the sales order notice and then actually receiving the shipping notice.
Pre-billing system --- Invoices are prepared upon the receipt of the order (after inventory and credit checks, ensuring order is in stock). There is usually little delay between receiving the sales order notice and the shipping notice.
Narratives for B/AR/CR Process:** Context Diagram:
The B/AR/CR process is triggered by the receipt of the sales order notification and shipping’s billing notification. The AR department sends the customer an invoice, and a GL invoice update is sent to the GL process. If the receiving department sends a sales return notification, a credit memo may be sent to the customer, and a GL sales return update occurs. Periodic statements are also sent to the customer during this time. Any estimated bad debts or write-offs are updated in the GL process. Once the customer sends in the check and remittance advice, deposit slips and endorsed checks can be send to the bank and a GL cash receipts update can be sent to the GL process.
Introduction- the OE/S performs the critical tasks of (1) processing customer orders, and (2) shipping goods to customers. The B/AR/CR completes the order-to-cash process with 3 activities:
(1) billing customers (collect and deposit cash)
(2) managing customer accounts (sales returns, bad debt, sending periodic statements)
(3) securing payment for goods or services rendered (record invoices and cash collections and inform general ledger process)
The process is an interacting structure of people, equipment, methods, and controls designed to create information flows and records that accomplish the following:
Horizontal View of B/AR/CR:
1. Shipping Department informs the accounts receivable department (billing section) of shipment.
2. Account receivable department (billing) sends invoice to customer.
3. Accounts Receivable department (billing) informs general ledger process that invoice was sent to customer.
4. Customer, by defaulting on amount due, informs credit department of nonpayment.
5. Credit department recommends write-off of the receivable and informs accounts receivable department.
6. Credit department, by changing credit limits, informs sales order department to terminate credit sales to customer.
7. Accounts receivable department informs general ledger process of write-off.
8. Customer makes payment on account.
9. Cashier informs accounts receivable department (cash applications sections) of payment.
10. Cashier informs general ledger of process of payment.
Organizational Setting- the key players in the B/AR/CR process are in the finance department. Within this department, there are two functions that are segregated, the treasury function and the controller function. The Treasury department effects the process by extending credit to customers (Credit Managers) and by collecting payment (Cashiers). The controller department handles the recordkeeping functions. It is important to segregate the duties of these departments so that their goals are not conflicting.
Managing the B/AR/CR Process: Leveraging Cash Resources:
Self-Service Systems (CSS) - The CSS system allows a customer to access information, perform a task, or complete an inquiry without the aid of the organization's employees. An example of this type of system is an automated phone system that allows the user to listen to a set of options and key in the departments they are looking for. This is popular with many companies as they no longer need to staff large call stations. More advanced systems can allow customers to check production planning for manufacturing in the future to determine if goods will be available when they need them.
Cash Receipts Management - this is freeing up funds so they can be invested to earn interest or used to reduce debt and save on interest expense. Management wants to shorten the collection time from when they make a sale to when they collect on the sale. Treasurers face problems as there are delays in payments, such as the float on a check (the time it takes for the bank to process the transaction and send payment to the organization). There are many ways Treasurers fight this float time:
The Magnetic Ink Character Recognition (MICR) that expedites the processing of checks throughout the banking channels. The MICR code sorts checks at a rate of nearly 100,000 an hour.
Credit cards (Charge Cards) are when a 3rd party removes from the collector the risk of noncollection from the vendor. This requires a fee from the vendor and the retailer submits the charges to the credit card company for reimbursement and the credit card company bills the customer.
Debit cards are the collector will transfer funds electronically from the payer’s to the collector’s balance. This eliminates the ‘Float’ and expedites payment from the customer.
Electronic Funds Transfer (EFT) is performed through an Automated Clearing House (ACH) and is one of the first solutions to combat the float time. Through a prearranged agreement between the trading parties, the collector's bank account is credited and payers account is debited for the payment. An example of this is automatically depositing your paycheck at work.
EFT uses a variety of technologies to transact, process, and verify money transfers and credits between banks, businesses, and consumers. The Federal Reserve Fedwire system is the ACH mentioned above. It obviously reduces the time and expense required to process cheks and credit transactions.
A lockbox is a postal address that is used solely for the collection of collecting checks. A firm will have these lock boxes all over the country so the mail arrives quickly and the bank speeds up the lockbox's check processing. The bank constantly processes the lockbox receipts, providing a quick update to the firm's bank balance.
Electronic lockbox is similar to the traditional lockbox but the bank scans the payer's remittance advice and sends it straight to the collector's accounts receivable system. The electronic lockbox allows the company to post cash receipts more rapidly, at reduced cost, and with more accuracy.
Electronic Check resembles a paper check with the inclusion of the customer's name, seller's name, financial institution, amount, and digital signature. These are protected with public-key cryptography to protect the customer's account from illicit activity.
Electronic Cash has started to catch on with banks, with this process, the customer creates an "electronic wallet." Then you can spend out of your wallet. This however is not traceable like a check.
Fraud
Lapping is a scheme involving the misappropriation of customer accounts as a result of the lack of a segregation of duties. It occurs when the person recording the transaction receives payment and deposits it. The person will steal a customer’s payment and use other customer’s payments to cover their tracks
The most current initiative in banking that has increased fraud on the A/R side is done through Check 21 which now allows a substitute electronic image to be presented at a customers bank almost immediately giving authorization to debit the drawor's account. This can lead to the ready acceptance of fraudulent checks against an unauthorized account.
Another common fraud is kiting. Kiting is "The common practice of allowing depositors to have immediate use of uncollected funds facilitates the scheme. Indeed, Regulation CC mandates early access to deposited funds. In the typical scheme, an NSF check is written by the malefactor on one account and then deposited into an account at another institution. A check drawn on the second account is then used to cover the resulting overdraft on the first account. Taking advantage of the float caused by normal delays in the collection system, the wrongdoer creates fictional balances in each account and uses these balances to obtain cash advances"(http://students.cup.edu/col4145/).
Logical Process
Remittance advice is business documentation used by the payer to notify the payee of the items being paid for. These may be an invoice copy, a stub attached to an invoice, or a stub attached to the payee’s check. The RA is used to initiate the recording of the cash receipt.
The accounts receivable master data is a repository of all unpaid invoices issued by the organization. When an invoice is created, a receivable is created in the master data. The records are updated at the time of payment. There are two AR systems that exist:
Data Descriptions in Billing/Accounts Receiveable/Cash Receipts
- Sales Event Data-on or more invoices records (details contained in the invoice data
- A/R Adjustments data-write-offs, estimated doubtful a/c sales returns
-jounal voucher number, transaction code, authorizaiton- Cash receipts data-details of customer payments
Types of Billing Systems:Narratives for B/AR/CR Process:**
Context Diagram:
The B/AR/CR process is triggered by the receipt of the sales order notification and shipping’s billing notification. The AR department sends the customer an invoice, and a GL invoice update is sent to the GL process. If the receiving department sends a sales return notification, a credit memo may be sent to the customer, and a GL sales return update occurs. Periodic statements are also sent to the customer during this time. Any estimated bad debts or write-offs are updated in the GL process. Once the customer sends in the check and remittance advice, deposit slips and endorsed checks can be send to the bank and a GL cash receipts update can be sent to the GL process.